A graduate tax to replace the current system of tuition fees and student loans is being proposed by the National Union of Students (NUS) as a way out of the government's dilemma over the rising costs of higher education.

Hundreds of students from across England are due to lobby parliament tomorrow as the political debate over whether to increase tuition fees hots up. With a government review due this year, a report published by university vice-chancellors, arguing that students would not be deterred if fees were increased from £3,145 to £5,000 a year, has been criticised by the NUS and provoked an early day motion by Labour MPs opposed to fees.

While universities press for more income to meet rising costs, the government is facing falling tax revenues and ministers have been reluctant to broach unpopular increases in tuition fees in the run-up to a general election.

The NUS plan, which would separate the cost of university courses from support for student living expenses, represents a radical break from decades of opposition to any form of payment for university tuition. All graduates would contribute towards higher education in general, according to their income — in effect a graduate tax. To cover their living costs, students would get a mixture of loans and grants, depending on their parents' income, and would pay loans back in the same way as they do at the moment, through the tax system.

The NUS president, Wes Streeting, said: "Students from across the country will be telling MPs why we need to abolish the disastrous top-up fees system. We are putting forward a radical proposal for an alternative system that is fairer for students, but still generates the kind of income the sector so badly needs.

"The current recession is a stark reminder that excessive levels of debt are unhealthy, both for individuals and the economy. We believe that higher education should be free at the point of use for all students, with graduates making a contribution according to how much they are benefiting financially from their own use of the system." Under NUS proposals, graduates from the same course could pay different amounts of graduate tax depending on their income. The organisation is also calling for a national bursary scheme, such as the one introduced in Wales, to replace the "shambolic" system of bursaries offered by individual universities in England.

"At the moment, bursaries vary hugely from one university to the next. We believe that financial support should be based on how much a student needs it, not where they happen to be studying," said Streeting.

The NUS lobby against lifting the cap on fees is backed by David Blunkett, a former education secretary, who said: "While it's clear that no government is going to pull the financial plug on the university sector by simply abolishing fees, it would, at this time of global financial downturn, be unacceptable to lift the cap and have a free-for-all across universities."

MP Paul Farrelly, who has put down an early day motion, said: "It is essential that the forthcoming review of university funding looks at all the evidence of the effect of fees and debt on students who attend our universities. I oppose introducing a market system in higher education – like in the US – which many elitists want. We need to increase participation by students from poorer backgrounds, not price them out of going to university at all."

The government is due to begin a review of fees this year.

The higher education minister, David Lammy, said: "We made a commitment to parliament during the last fees review that we would return to the issue only after the first cohort of students paying under the current regime had finished their degrees. We are not breaking that commitment."